Problem:
A firm wishes to calculate the weighted average cost of capital according to the following weights: 40% long term debt, 10% preferred stock, and 50% common equity (retained earnings and or common stock). The firm's tax rate is 40%.
- Pertinent information is as follows:
- Cost of debt: 9.4%
- Cost of preferred stock: 12.7%
- Cost of retained earnings: 14.79%
- Breakpoint (associated with exhaustion of retained earnings): $14,000,000
- Retained earnigns: $7,000,000
Question: What is the weighted average cost of capital between zero and the break point?
Note: Show all workings.